4PSB Refer to the information reporte... [FREE SOLUTION]

BTN 12-4 Your friend, Diana Wood, recently completed the second year of her business and just received annual financial statements from her accountant. Wood finds the income statement and balance sheet informative but does not understand the statement of cash flows. She says the first section is especially confusing because it contains a lot of additions and subtractions that do not make sense to her. Wood adds, “The income statement tells me the business is more profitable than last year and that’s most important. If I want to know how cash changes, I can look at comparative balance sheets.”

Required

Write a half-page memorandum to your friend explaining the purpose of the statement of cash flows. Speculate as to why the first section is so confusing and how it might be rectified.

Katie Murphy is preparing for a meeting with her banker. Her business is finishing its fourth year of operations. In the first year, it had negative cash flows from operations. In the second and third years, cash flows from operations were positive. However, inventory costs rose significantly in year 4, and cash flows from operations will probably be down 25%. Murphy wants to secure a line of credit from her banker as a financing buffer. From experience, she knows the banker will scrutinize operating cash flows for years 1 through 4 and will want a projected number for year 5. Murphy knows that a steady progression upward in operating cash flows for years 1 through 4 will help her case. She decides to use her discretion as owner and considers several business actions that will turn her operating cash flow in year 4 from a decrease to an increase.

Required

1. Identify two business actions Murphy might take to improve cash flows from operations.

2. Comment on the ethics and possible consequences of Murphy’s decision to pursue these actions.

Refer to the information reported about Golden Corporation in Problem 12-6A.

Required

Prepare a complete statement of cash flows using a spreadsheet as in Exhibit 12A.1; report operating activities under the indirect method. Identify the debits and credits in the Analysis of Changes columns with letters that correspond to the following list of transactions and events.

a. Net income was \(136,000.

b. Accounts receivable increased.

c. Inventory increased.

d. Accounts payable increased.

e. Income taxes payable increased.

f. Depreciation expense was \)54,000.

g. Purchased equipment for \(36,000 cash.

h. Issued 12,000 shares at \)5 cash per share.

i. Declared and paid $89,000 of cash dividends.

Use the following information to determine this company’s cash flows from investing activities.

Equipment with a book value of $65,300 and an original cost of $133,000 was sold at a loss of \(14,000.
Paid \)89,000 cash for a new truck.
Sold land costing $154,000 for $198,000 cash, yielding a gain of \(44,000.
Long-term investments in stock were sold for \)60,800 cash, yielding a gain of $4,150.

Gazelle Corporation, a merchandiser, recently completed its calendar-year 2017 operations. For the year, (1) all sales are credit sales, (2) all credits to Accounts Receivable reflect cash receipts from customers, (3) all purchases of inventory are on credit, (4) all debits to Accounts Payable reflect cash payments for inventory, and (5) Other Expenses are paid in advance and are initially debited to Prepaid Expenses. The company’s balance sheets and income statement follow.

GAZELLE CORPORATION

Comparative Balance Sheets

December 31, 2017 and 2016

2017

2016

Assets:
Cash	\(123,450	\)61,550
Accounts receivables	77,100	80,750
Inventory	240,600	250,700
Prepaid expenses	15,100	17,000
Total current assets	456,250	410,000
Equipment	262,250	200,000
Accumulated depreciation – Equipment	(110,750)	(95,000)
Total assets	\(607,750	\)515,000

Liability and equity
Accounts payable	\(17,750	\)102,000
Short-term note payable	15,000	10,000
Total current liabilities	32,750	112,000
Long-term note payable	100,000	77,500
Total liabilities	132,750	189,500

Equity
Common stock, \(5 par value	215,000	200,000
Paid-in-capital in excess of par common stock	30,000	0
Retained earnings	230,000	125,500
Total liabilities and equity	\)607,750	\(515,000

GAZELLE CORPORATION

Income Statement

For Year Ended December 31, 2017

Particular	Amount \)	Amount \(
Sales		\)1,185,000
Cost of goods sold		595,000
Gross profit		590,000
Operating expenses:
Depreciation expenses	\(38,600
Other expenses	362,850
Total operating expenses		401,450
		188,550
Other gains and losses
Loss on sale of equipment		(2,100)
Income before taxes		186,450
Income tax expenses		28,350
Net income		\)158,100

Additional Information on Year 2017 Transactions

a. The loss on the cash sale of equipment was \(2,100 (details in b).

b. Sold equipment costing \)51,000, with accumulated depreciation of $22,850, for $26,050 cash.

c. Purchased equipment costing $113,250 by paying $43,250 cash and signing a long-term note payable for the balance.

d. Borrowed \(5,000 cash by signing a short-term note payable.

e. Paid \)47,500 cash to reduce the long-term notes payable.

f. Issued 3,000 shares of common stock for \(15 cash per share.

g. Declared and paid cash dividends of \)53,600.

Required

Prepare a complete statement of cash flows; report its operating activities using the indirect method. Disclose any noncash investing and financing activities in a note.

Analysis Component

Analyze and discuss the statement of cash flows prepared in part 1, giving special attention to the wisdom of the cash dividend payment.

Operating activities
Net income	$158,100
Depreciation expenses	38,600
Loss on sale of equipment	2,100
Decrease in accounts receivables	3,650
Decrease in inventory	10,100
Decrease in prepaid expenses	1,900
Decrease in account payable		84,250
Investing activities
Sale of equipment	26,050
Purchase of equipment		43,250
Financing activities
Short-term note payable	5,000
Payment for long-term note payable		47,500
Shares issued	45,000
Cash dividend		53,600
	$681,950	$681,950

Short Answer

Step by step solution

Definition of Cash Flow from Operation

Analysis of changes on the debit and credit side

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Help

Debits of the balance sheet:
Cash	$61,550			$123,450
Accounts receivable	80,750		3,650	77,100
Inventory	250,700		10,100	240,600
Prepaid expenses	17,000		1,900	15,100
Equipment	200,000	113,250	51,000	262,250
	$610,000			$718,500
Credits of the balance sheet:
Accumulated depreciation – equipment	95,000	22,850	38,600	110,750
Account payable	102,000	84,250		17,750
Short-term note payable	10,000		5,000	15,000
Long-term note payable	77,500	47,500	70,000	100,000
Common stock	200,000		15,000	215,000
Paid-in-capital in excess of par common stock	0		30,000	30,000
Retained earnings	125,500	53,600	158,100	230,000
Noncash financing and investing activity		70,000	70,000
	$610,000			$718,500